Growing Competition No Threat To Dominance In African Markets

China | Oil & Gas | Thu May 01, 2014

BMI View : China's attempt to increase its attractiveness as an African trading partner is in part a response to mounting competition in the region from India and Japan. Despite this competition, other Asian investors will struggle to displace dominant Chinese influence and we see China growing its presence in the east African frontier market over the coming decade.

Chinese Premier Li Keqiang is to visit four African countries this month - Angola, Ethiopia, Kenya and Nigeria - in his first visit to the continent since taking office in 2013. According to comments by Chinese officials, Li plans to sign several major cooperation agreements, covering a range of sectors, including oil, infrastructure, agricultural and socio-economic development.

Growing Competition No Threat To Dominance In African Markets

China | Oil & Gas | Thu May 01, 2014

BMI View : China's attempt to increase its attractiveness as an African trading partner is in part a response to mounting competition in the region from India and Japan. Despite this competition, other Asian investors will struggle to displace dominant Chinese influence and we see China growing its presence in the east African frontier market over the coming decade.

Chinese Premier Li Keqiang is to visit four African countries this month - Angola, Ethiopia, Kenya and Nigeria - in his first visit to the continent since taking office in 2013. According to comments by Chinese officials, Li plans to sign several major cooperation agreements, covering a range of sectors, including oil, infrastructure, agricultural and socio-economic development.

Reshaping its African engagement...

Traditionally, China has adopted a policy of non-interventionism in its relations with Africa. Oil deals have generally taken the form of resource-backed loans and credit lines for large-scale infrastructural projects. Critically, and in stark contrast to the West, they have come free of any political conditionality, something that has appealed strongly to many African governments.

However, the appeal seems to be waning. For many African populations, the loans have wrought little benefits, and anti-Chinese sentiment is growing in many parts of the continent. We believe this stems from several facets of Sino-African engagement:

Construction contracts for the major infrastructural projects have normally fallen to Chinese companies, and Chinese workers have often been brought in as labour, alienating local business interests

Political non-interference has allowed to China to sustain relations with repressive and authoritarian regimes, such as the ruling al-Ingaz in Sudan; these connections have caused increasing reputational damage amongst many segments of African society in recent years

In context of growing resource nationalist sentiment in Africa, the Chinese 'oil-for-loans' approach has led to accusations of resource imperialism and neo-colonialism

In recent years, attacks on Chinese workers and migrants have been growing, whilst the number of Chinese deportations from Africa has increased substantially. In response, China appears to be reorienting its relations with Africa, adopting a more humanitarian approach: according to Chinese officials, Li's visit will discuss terms for cultural, social and political cooperation, as well as trade and economic linkages.

Augmenting its western stronghold...

China's sensitivity to anti-Chinese sentiment in Africa may reflect its concerns over growing competition in the region from other Asian buyers. In particular, Japan and India have been making ambitious plays to increase their footprint in the sub-Saharan African market.

In 2013, Japan pledged USD32bn in aid across Africa. It also granted the state-run Japan Oil, Gas and Metals National Corp (JOGMEC) USD2bn financing over the next five years, to support its expansion into African natural resource development projects. India has also made significant headways into the African oil and gas market, taking acreage in all the region's major producers - Angola, Nigeria, Mozambique and South Sudan - alongside emerging producers such as Ghana.

As Asian oil demand growth continues to outstrip domestic production, we expect to see competition between Asia's three largest economies intensify over the coming years.

Appetite For Growth

Asia Pacific Oil Production, Consumption and Net Exports, 2008-2018

However, we believe that both Japan and India will struggle to displace China's dominant role on the continent. Several factors are driving this view:

Economic power: China has the advantage in terms of sheer economic strength. China is able to provide more credit lines and concessional loans than other Asian nations, and can use this to leverage against African governments.

First-mover advantage: China has a longer and deeper history of engagement than India or Japan; it is deeply embedded in the economies of several oil-producing countries, in particular South Sudan and these countries would find it difficult to reorient towards other Asian investors.

Capital-rich NOCs: China's oil companies typically have access to wider and cheaper capital than Indian or Japanese oil companies. This allows them to outbid their Asian competitors, and may make them more attractive partners to other international oil companies (IOCs).

Keeping the Dragon's Share

Sub-Saharan Africa's Crude Oil Exports By Destination (%), 2012

And turning its attentions east...

We believe that Li's visit to Kenya and Ethiopia is also significant, and may indicate China's intent to diversify its east African footprint. Traditionally, China has invested heavily in Sudan and South Sudan. However, instability has caused the investment to be highly volatile. Dispute between the two countries brought a 14 month shutdown in South Sudanese oil production, post-independence. Output resumed in 2013, but has been in decline again recently due to spiralling civil conflict.

Risks Outstripping The Rewards

Sudan and South Sudan Monthly Oil Production ('000b/d), 2011-2014

We believe that China may look to reduce its exposure in South Sudan over the longer-term, turning its attention on other regional prospects.

China already has significant interests in emerging producer Uganda, and the Chinese National Offshore Oil Company (CNC) is expecting first crude output from its Ugandan Kingfisher field in late 2018.

Following major commercial discoveries, China is investing heavily in Kenyan infrastructural projects, including a large-scale rail project improving connections to the port of Mombasa

Exploration in Ethiopia has yielded mixed results, but growing trade relations between the two would leave China strongly positioned, should more positive results accrue

Both Uganda and South Sudan are land-locked countries; building ties with Kenya and Ethiopia could enable to China to secure export routes for its production